U.S. Treasury Bonds Lose Long-Held Yield Advantage and Taxpayers Face Higher Costs

U.S. Treasury securities are no longer enjoying the yield discount that for decades defined them as the world’s primary safe-haven asset, according to a recent working paper circulated by the National Bureau of Economic Research (NBER). The study finds that the “convenience yield” on Treasurys—an interest-rate benefit investors once accepted in exchange for unparalleled safety, liquidity and regulatory advantages—has not only disappeared but turned negative since 2022.

What the Study Shows

The NBER paper, titled “Convenience Lost,” compares yields on Treasury securities with Secured Overnight Financing Rate (SOFR) swap rates of similar maturities. SOFR swaps are widely regarded as the current risk-free benchmark. Researchers measured the gap between the two rates to determine the convenience yield across different maturities.

Data reveal that at the 10-year maturity, the convenience yield exceeded one percentage point at the start of the 2000s. It then declined steadily, briefly spiking during the 2008 global financial crisis, and hovered near zero for much of the past two decades. Since 2022, the yield has been consistently negative and currently sits at roughly minus 0.25 percentage point.

A negative convenience yield indicates that Treasurys now pay more interest than comparable risk-free instruments. In practical terms, investors are no longer willing to accept lower returns merely for holding U.S. government debt. The study attributes the earlier positive yield to the bonds’ superior safety, liquidity and capital-requirement treatment under financial regulations. The erosion of those advantages appears to have removed the incentive for investors to accept lower yields.

Implications for Investors and Markets

The findings suggest that in a future flight to quality, investors may look beyond Treasurys when seeking secure assets. Traditionally, U.S. government debt has been the default refuge during periods of market stress. With yields no longer offering a discount, alternative instruments—such as high-quality corporate paper, repurchase agreements or non-U.S. sovereign bonds—could gain ground.

The shift also places the Federal Reserve’s upcoming policy meetings in sharper relief. Market participants have been monitoring whether political pressure on central-bank independence could further affect confidence in government securities. Although the NBER study does not directly address political factors, its data underline a trend of waning faith in Treasurys that has been unfolding for years.

Cost to the Federal Budget

A positive convenience yield historically delivered substantial savings to taxpayers, allowing the Treasury Department to borrow at rates below what private borrowers or even some foreign governments paid. The NBER researchers estimate those savings reached hundreds of billions of dollars over multiple decades.

The reversal now imposes the opposite effect. With investors demanding higher yields, federal interest expenses are expected to rise markedly. The study projects that the negative convenience yield could translate into hundreds of billions of dollars in additional interest payments in the years ahead, placing extra pressure on the U.S. budget at a time when the national debt is already at record levels.

Why the Yield Advantage Vanished

Several factors may explain the disappearance of Treasurys’ yield premium:

Liquidity changes: Advances in financial technology and the growth of alternative collateralized instruments have made non-Treasury assets easier to trade and finance.

Regulatory shifts: Post-crisis banking rules have expanded the pool of high-quality liquid assets, reducing Treasurys’ unique status for meeting capital requirements.

Market perceptions: Episodes of political gridlock over debt-ceiling increases and debates about Federal Reserve autonomy have, at times, raised questions about the absolute safety of U.S. obligations.

The NBER paper focuses on yield data rather than assigning weight to each factor, but the combined effect has eroded the “specialness” that once let the government borrow more cheaply.

Next Steps for Policymakers

The growing cost of servicing the national debt may prompt renewed discussions in Congress and at the Treasury Department on debt-management strategies. Options include adjusting the maturity profile of new issuance or increasing reliance on Treasury Inflation-Protected Securities (TIPS). However, the study implies that structural market forces, rather than issuance tactics, are driving the deeper shift in convenience yield.

Federal Reserve officials will likely consider the findings as they evaluate monetary policy and financial-stability tools. A diminished safe-haven premium could alter the dynamics of quantitative easing or emergency lending programs that rely on Treasurys as primary collateral.

For households and institutional investors, the changing landscape underscores the importance of diversifying fixed-income portfolios. While Treasurys still carry negligible default risk, their comparative advantage has narrowed, and yield considerations now resemble those for other high-quality assets.

Further coverage of interest-rate trends and federal budget impacts can be found in our Finance News Update section.

Finance News Update

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